NYT: Inside the Fed in 2006: A Coming Crisis, and Banter

[Larry]

Yes, quite a few people have been saying "I've got a bad feeling about his". Many of them for decades.

I've been saying it for years.

That doesn't make me an expert economist. Doesn't even permit me to claim that "I saw this coming". (Because I didn't).

It simply shows that if one keeps saying "something bad is going to happen", long enough, something bad will eventually happen.

[mojobo]

It simply shows that if one keeps saying "something bad is going to happen", long enough, something bad will eventually happen.

It isn't just people saying "something bad is going to happen" though. It's people who lay out in extremely specific detail the exact burdens our economy faces, what those burdens will do, and the impact on prices and overall employment/wages on our economy. If you can honestly watch a video like "Peter Schiff Was Right" or read the book Crashproof and think that people are just putting out a general warning you are doing yourself a great disservice. Even if you look at Ron Paul's investments he is destroying the market. He had a list of top 10 stocks to hold over the last decade which averaged a 600% return compared to the S&P losing 3%, and most of the articles about that were he was making "bets against America". He understands completely the problems we face and how to get our economy on track. I really don't understand how people can look at how right these people have been at laying out our problems and still look at how clueless our leaders have been and think they are making simple errors or that the people who were right were making simple "economy is bad" statements.

[SkinsHokieFan]

Yes, quite a few people have been saying "I've got a bad feeling about his". Many of them for decades.

I've been saying it for years.

That doesn't make me an expert economist. Doesn't even permit me to claim that "I saw this coming". (Because I didn't).

It simply shows that if one keeps saying "something bad is going to happen", long enough, something bad will eventually happen.

Thats just ridiculous Larry

There were people in this very tailgate (Ignatius T comes to mind right away as does ATB) who in 2005 were calling this a bubble and calling out exactly what would happen.

[PeterMP]

You'd better hope that the fallible humans you entrust with that power are right in their assessment of one of the most complex systems in existence. Because if they're not, we're all screwed.

In every economic system, the controlling factor is going to be humans.

[Hubbs]

In every economic system, the controlling factor is going to be humans.

Um... yes. That would be a central theme to my point.

[PeterMP]

It isn't just people saying "something bad is going to happen" though. It's people who lay out in extremely specific detail the exact burdens our economy faces, what those burdens will do, and the impact on prices and overall employment/wages on our economy. If you can honestly watch a video like "Peter Schiff Was Right" or read the book Crashproof and think that people are just putting out a general warning you are doing yourself a great disservice. Even if you look at Ron Paul's investments he is destroying the market. He had a list of top 10 stocks to hold over the last decade which averaged a 600% return compared to the S&P losing 3%, and most of the articles about that were he was making "bets against America". He understands completely the problems we face and how to get our economy on track. I really don't understand how people can look at how right these people have been at laying out our problems and still look at how clueless our leaders have been and think they are making simple errors or that the people who were right were making simple "economy is bad" statements.

The problem is that there are other people that predicted it that disagree with Schiff and Paul.

Somebody like Dean Baker has said that we need MORE stimulus:

http://www.counterpunch.org/2009/07/15/stimulus-arithmetic/

and MORE regulation:

http://bostonreview.net/BR34.1/baker

Robert Shiller is similar.

Why should we listen to the likes of Paul and Schiff and not Baker and Shiller?

(This gets into additive expert opinion vs. non-additive expert opinion?)

[DjTj]

Maybe I'll start with this.

No, it doesn't. But quite honestly, I don't know what you're talking about. I'm addressing your points on a case-by-case basis. If there's something that I'm saying that you'd like to know more about, all you have to do is ask. This is obviously something I care about, and therefore I'm always willing to provide more information about it as long as I have the time.

It is difficult to have a real debate when it is not clear what you are advocating for, so to make things more clear, I am thinking about a comparison between our current system (run by a Federal Reserve Board) and a system of competing currencies, as Ron Paul has proposed and as CR mentioned here.

You can usually tell when a system is headed for failure when it takes force to implement it. For instance nobody would probably even need to dismantle the FED, if you could legalize competition in currencies and eliminate its government enforced monopoly on legal tender then it would probably dismantle itself. Without the force of govt backing it, it probably would not survive.

I actually disagree that competing currencies would beat the Federal Reserve in the open market. The result of currency competition in virtually every civilization has resulted in some kind of standard, whether it was gold coins or shells or banknotes. There are significant efficiencies gained through a single currency, and opening up the market to competing currencies, only to have us arrive at a different national currency after a period of competition, does not seem that great to me.

Then—and I wish I could say this in a completely friendly way, but I honestly don't think there's a way to do that—I don't think you've spent enough time studying the effects of debt on prices, the cumulative effect of individual debts upon an entire economy, and the enormous economic assumptions that are made by giving the Fed the powers that it has.

Your condescension isn't going to change anyone's mind here, and if you are trying to convince me that I can't trust the most educated and qualified economists in the country to run our monetary policy, I don't think your strongest argument is that I need more education and qualifications. It seems equally likely that extra studying would lead me to their position as it would lead me to yours.

I'm not saying that everyone knew every last detail about how thoroughly Wall Street was invested in real estate. I'm saying that the people in charge knew enough to know that if real estate suffered a significant downturn, there would be devastating ramifications throughout the economy. I'm willing to add that I'm also saying that even though these people knew this, they were willing to go in front of television cameras and say the exact opposite because they believed doing otherwise would create a self-fulfilling prophecy of a major crash. Which is partially correct. It would indeed have had that effect. The flaw in their thinking is that such a crash could be avoided so long as they said the right things.

While your Juncker quote is nice, there is no evidence that this is what was happening in the 2006 Fed meetings, where their comments would not be public for 5 years. It looks very much like they truly misunderstood the spillover effects of the housing crash.

Technically, we're really talking about the federal funds rate moreso than the discount rate. But anyway, please describe this difference. I'm going to go ahead and guess that the description will involve some variation of, "Well, you see, the federal funds rate is really-super-important, and therefore should be centrally controlled."

No, it's not more important than milk per se. But I do believe that it is more important that the banking system has confidence in these rates than it is to set these rates at the absolute best (market-determined) level.

It's like the continued use of English units of measurement. It is not the best system, but having a standard that everyone agrees to allows many other things to function. Or maybe another example is the FCC's allocation of radio spectrum. Every band of frequency is not always going to the best possible use, but it's just important that we agree on what certain frequencies are used for, and that we have confidence that everyone will abide by those rules. Open competition within one radio frequency would render it useless.

Rates set by the Federal Reserve are something that everyone can have confidence in, and absolute precision isn't necessary (although of course it is important that the Fed is trying its best to set the *right* rate, just like it is important that the FCC try to allocate radio spectrum in an efficient way). Mistakes can and will happen, but there is inherent value in just having a standard and a system that everyone agrees to use.

Also, I'm not really sure how I'm using "should" any more than anyone else who would be engaging of a discussion of the means by which Americans, well, should be able to exchange goods and services with each other. There has to be some system recognized by the law of the land. If you're not using the word "should," you're doing nothing more than using some sort of convenient grammatical replacement.

Well, I suppose I am just asking for something to back up your "should." I'd like to see some clear evidence that your proposal for radical change would be better than our current system.

As for the "why," it depends on the country, but generally there were two larger goals driving the shift to the euro. The first was an extension of the real goal of the EU itself, economic cooperation that would end the history of countless wars in Europe. The second was to "team up" in order to compete with the United States.

But why did they need to team up to compete with the United States? Is there something valuable about being in our position? Is there value in our status as the world's reserve currency? Wouldn't we lose something by giving that up?

Secondly, I would suggest that you seem to be making a great deal of assumptions if you believe that the majority of the changes that I would make have "never been tested in the real world." You are aware that the Fed is not as old as the United States, right?

Well, what are you proposing then exactly? Because I understand that Ron Paul is proposing a system of competing currencies (controlled by private entities?). I don't think that existed before the Fed.

monetary policy[/i] that was the primary cause of our economic success in the 20th century. Again, you appear to be suggesting that one single factor determines whether or not any economic success can be attained.

Actually, I think you are the one assuming that monetary policy is most important factor in determining our prosperity. I think it is only one factor among many, that it doesn't matter that much that our policy is determined by a small committee of fallible human beings, and that the system is robust enough to withstand mistakes made by those human beings. I do not believe it is the best system, but I do not believe it is fundamentally flawed, and I do not see an urgent need to dismantle the system.

You also appear to be suggesting that monetary policy is somehow an international zero-sum game, that if we fail then our failure should automatically result in another country succeeding. This is not the case. And no, I'm not advocating China's policies. China has in fact made greater monetary mistakes than our own, and is in the first stages of repercussions. They are at the same point that Japan was in the mid-1980's, when everyone was saying that Japan was destined to take over the world economically. Today, we look back at those predictions and laugh. Decades from now, we're going to look back on the glorious predictions being made about China and laugh even harder. I would suggest Googling "China" and "real estate bubble" for an example of what will be one of the primary drivers of the Chinese crash. It makes our own bubble look like a quaint blip on the economic radar. "China" and "ghost cities" would be another good combination.

So are you saying that there is no country in the world implementing a monetary policy similar to what you would like to see? If your ideas are so much better, and all countries of the world are competing with each other, why hasn't anyone tried it?

[PeterMP]

Um... yes. That would be a central theme to my point.

You generally seemed to be suggesting there is a system where the decision making legally could be taken out of the hands of humans.

---------- Post added January-14th-2012 at 12:00 PM ----------

I'm not saying that everyone knew every last detail about how thoroughly Wall Street was invested in real estate. I'm saying that the people in charge knew enough to know that if real estate suffered a significant downturn, there would be devastating ramifications throughout the economy. I'm willing to add that I'm also saying that even though these people knew this, they were willing to go in front of television cameras and say the exact opposite because they believed doing otherwise would create a self-fulfilling prophecy of a major crash. Which is partially correct. It would indeed have had that effect. The flaw in their thinking is that such a crash could be avoided so long as they said the right things. This is best highlighted by a statement made by perhaps the eurocrat of all eurocrats, Jean-Claude Juncker, regarding Europe's continued financial downward spiral:

"When it becomes serious, you have to lie."

I'm guessing he regrets admitting that in public.

Did you read the article in the OP?

What are you claiming here?

That the members of the Fed essentially staged their comments at a meeting ahead of time so that they could "lie" to the public 5 years down the road when the comments from that meeting were released?

[Hubbs]

I'll get to Dj's post in a bit.

The problem is that there are other people that predicted it that disagree with Schiff and Paul.

Somebody like Dean Baker has said that we need MORE stimulus:

http://www.counterpunch.org/2009/07/15/stimulus-arithmetic/

and MORE regulation:

http://bostonreview.net/BR34.1/baker

Robert Shiller is similar.

Why should we listen to the likes of Paul and Schiff and not Baker and Shiller?

(This gets into additive expert opinion vs. non-additive expert opinion?)

Yes, which is why the fact that Paul and Schiff successfully predicted the housing bubble is not, and has never been, my only evidence. Yet somehow, across countless threads over the span of what has literally amounted to multiple years, every piece of evidence that I've presented so as to bolster my economic arguments has been treated in isolation, as if I've never written about anything else that has to do with economics, never presented the many forms of other evidence posted in other threads. Surprise, it's happening again.

You generally seemed to be suggesting there is a system where the decision making legally could be taken out of the hands of humans.

No, I'm not. I'm suggesting that there is a system in which the setting of interest rates is done by the sum total of all humans, rather than a select few, just as there is a system in which the setting of the price of milk is, in the big picture, set by the sum total of all humans. We currently live in such a system when it comes to milk.

Did you read the article in the OP?

What are you claiming here?

That the members of the Fed essentially staged their comments at a meeting ahead of time so that they could "lie" to the public 5 years down the road when the comments from that meeting were released?

I'm not talking about the Fed minutes, I'm talking about the comments made in real time, when the Fed chairman goes in front of cameras and tells everyone what to expect from the economy.

But I'll go ahead and address the Fed minutes since you're bringing them up. You're going to great lengths to paint my comments as much more than what they are. There's no conspiracy, no secret plot. There's nothing more than basic human nature. I have absolutely no doubt that the board members speak differently in a setting in which they know that their exact words will eventually be published for all to see, and indeed picked apart to the very last detail by the business community, than they do in a setting in which their exact words will remain unknown forever. Suggesting otherwise is lunacy, on par with suggesting that the things that Hank Paulson was saying in front of cameras in 2008 were exactly the same as what he was saying behind closed doors. We're talking about people who believe that "animal spirits" are a large driver of the economy. (And again, to a certain extent, they're right.) Saying something that would remove their ability to manipulate those spirits in the next crisis would only be slightly more damaging than saying something that would remove their ability to manipulate those spirits in this crisis. Moreover, saying anything beyond what you (not you Peter, the general "you") have to say that would make it easier for the public to specifically identify you as someone who has greatly ****ed up when you know the statement will be published is not particularly likely. They're not going to do it so long as they're aware that they're doing it.

[JMS]

So the ones who DID know are psychics according to this logic, thus should be listened to more closely

Even a broken clock is right twice a day. There are only a small handful of guys who predicted the failure. What clout these guys have on the street mostly come from thise sole forcast, not a proven track record of being able to read the economy.

Was the Fed Wrong, and were they part of the problem. Yeah they were. They failed to predict how dropping the US interest rate to 1% interest would effect the international large fund investors. They also failed to understand how building out the infrastructure for subprime loans and slashing banking regulations put the economy at risk.

But hell the President, Senate, and Congress were also in that same boat.

[PeterMP]

Yes, which is why the fact that Paul and Schiff successfully predicted the housing bubble is not, and has never been, my only evidence. Yet somehow, across countless threads over the span of what has literally amounted to multiple years, every piece of evidence that I've presented so as to bolster my economic arguments has been treated in isolation, as if I've never written about anything else that has to do with economics, never presented the many forms of other evidence posted in other threads. Surprise, it's happening again.

1. The post I was responding to was mojobo's and that seemed to his point.

2. You and I have discussed your economic ideas mulitple times. I specifically remember one very long thread that ended with you promising another post addressing my last post. Don't pretend like I don't have a history of having detailed discussions.

I'm trying not to side track threads as much (as it has been pointed out by mods a couple of times). If you want to, your welcome to go back and find the whole thread (which was already probably a side track, but I'm gussing the mods won't mind a continuing side track of an old thread.

No, I'm not. I'm suggesting that there is a system in which the setting of interest rates is done by the sum total of all humans, rather than a select few, just as there is a system in which the setting of the price of milk is, in the big picture, set by the sum total of all humans. We currently live in such a system when it comes to milk.

1. Is there any reason to believe that the system involving all humans would be any better w/ respect to what is really happening with respect to the Fed (i.e. the Fed isn't REALLY making decisions in a vaccum)?

2. There is a Constitutional difference between milk and money. Do you think there is a reason for that? That by law it doesn't have to affect money differently than milk?

(Note, to me, the answers to these questions likely will result in a side tracking of this thread, and it would probably be better for you to go back and respond to the other thread I was talking about before because the answers are related to the things that we were talking about there.)

I'm not talking about the Fed minutes, I'm talking about the comments made in real time, when the Fed chairman goes in front of cameras and tells everyone what to expect from the economy.

But I'll go ahead and address the Fed minutes since you're bringing them up. You're going to great lengths to paint my comments as much more than what they are. There's no conspiracy, no secret plot. There's nothing more than basic human nature. I have absolutely no doubt that the board members speak differently in a setting in which they know that their exact words will eventually be published for all to see, and indeed picked apart to the very last detail by the business community, than they do in a setting in which their exact words will remain unknown forever. Suggesting otherwise is lunacy, on par with suggesting that the things that Hank Paulson was saying in front of cameras in 2008 were exactly the same as what he was saying behind closed doors. We're talking about people who believe that "animal spirits" are a large driver of the economy. (And again, to a certain extent, they're right.) Saying something that would remove their ability to manipulate those spirits in the next crisis would only be slightly more damaging than saying something that would remove their ability to manipulate those spirits in this crisis. Moreover, saying anything beyond what you (not you Peter, the general "you") have to say that would make it easier for the public to specifically identify you as someone who has greatly ****ed up when you know the statement will be published is not particularly likely. They're not going to do it so long as they're aware that they're doing it.

This thread is about a meeting in 2006.

You stated that the Fed knew that real estate budget was bad enough to negatively affect the wider economy.

You didn't state a date.

And then you didn't answer the direct question I asked you.

Do you believe in 2006 that the Fed knew that the housing slow down would have affects any where close to what it did?

If so, why?

(I think this portion is likely "on topic".)

[mojobo]

The problem is that there are other people that predicted it that disagree with Schiff and Paul.

Somebody like Dean Baker has said that we need MORE stimulus:

http://www.counterpunch.org/2009/07/15/stimulus-arithmetic/

and MORE regulation:

http://bostonreview.net/BR34.1/baker

Robert Shiller is similar.

Why should we listen to the likes of Paul and Schiff and not Baker and Shiller?

(This gets into additive expert opinion vs. non-additive expert opinion?)

Fair enough, at the very least the debate should be between people who got it right between people who could very clearly see what the problem is, and not the people who inherently created the problems. Personally I can see a tremendous amount of flaws in his suggestions of greater stimulus, mainly stemming from the question where does the money come from, but at the very least it will be a discussion by someone who can actually see a problem in the making.

Assuming that you do take his position though of higher stimulus, I have a couple questions...

1) what benefits do you think will come from it?

2) where will the money come from?

3) what specific spending should be done with the stimulus?

4) is there a point where there is too much stimulus? if yes what is that amount or how do you derive it?

Feel free to ask any questions in return of where you think a free market person might go wrong. For what it's worth I have a degree in economics and spend a lot of time researching every aspect of our economy I can. Like Hubbs said I'd much rather discuss the matter at hand rather than the people involved, but it for arguments sake I like to show that following a different economic philosophy lead to people being very right and prosperous during the economic downturn.

[Thiebear]

Yes, quite a few people have been saying "I've got a bad feeling about his". Many of them for decades.

I've been saying it for years.

That doesn't make me an expert economist. Doesn't even permit me to claim that "I saw this coming". (Because I didn't).

It simply shows that if one keeps saying "something bad is going to happen", long enough, something bad will eventually happen.

My company got out of the subprime 2yrs before it collapsed (still in trouble but not compared to our competition). We had Presidents and Senators state it as a fact. Barney was doing his damndest to hold it back...

We had regular people pointing it out on a Redskins forum.

I'm not talking Glenn Beck Iran is going to kill us any second now radio from 2009 - present. Actual statements of fact, easily verified and common sense approved.